Introduction to Blockchain

Tiran Dagan leads the Emerging Digital Technologies practice for IBM in North America.

Blockchain is a combination of software and technology architecture capable of controlling the flow or transfer of assets to produce value. These assets can be tangible assets such as a car or house and intangible assets such as a loan, mortgage or insurance coverage. Blockchain makes use of shared ledgers to record transactions and to register and activate contracts.

When a business network (a collection of business participants) join a Blockchain, the members of that network share a replicated ledger. For instance, the buyer of goods, the seller, the bank used to finance the transaction, insurer, regulator, auditor: all these participants receive a replicated copy of the ledger which manages the transaction. Blockchain architecture handles the permissions (who can see and who can add to the chain), manages the peers, addresses consensus and security.

I want to touch on something you are likely familiar with: Bitcoin is ostensibly recognized and frequently confused with Blockchain. Bitcoin is crypto-currency some people associate with black market transactions because of the annonimity associated with its use. That said, there are legitimate applications for Bitcoin and even a few Bitcoin ATMs have popped up - search for a Bitcoin ATM near you. The most important aspect of Bitcoin is its lack of need for a 3rd part to issue/mint the currency (typically a government) or to intermediate transactions (banks and financial institutions). If you think Bitcoin's benefit is just in its anonymity then you are wrong: in a monetary system which defies regulation and centralized authority there are tremendous benefits. One of the most recent one is micropayments: if there is no one collecting fees for transactions then an entire micropayment economy has the opportunity to thrive. Earlier in 2017 the infamous Kim Dotcom announced the launch of his micropayment service BitCache which allows content providers to collect micropayments from users who view their content. If you could reward a content provider with $0.01 why not do so? That's more than the fees generated by advertising which are calculated in CPM (cost per thousand eyeballs).

It's important to understand that bitcoin is a specific application for blockchain but there are other blockchain implementations which prioritize identity of parties(vs. the anonymous nature of bitcoin) or deal with the transacting of assets versus currency. Just like all roses are flowers, not all flowers are roses.

Here's an example how this all works: A manufacturer sells widgets to a buyer. The buyer's bank can participate in the transaction and issue a Letter of Credit by adding it to the blockchain. That LOC becomes a permanent part of the ledger. Meanwhile, a shipping company in this business network can attach RFID sensor data indicating a container of goods from the manufacturer just arrive in the destination country to automatically update the LOC credit facility. With trust in the blockchain all the participants can rest assured that they have full information about the transaction. From this example you can see the basic components of blockchain: the notion of "appending" information to the block chain; the immediacy, near-real-time nature of the transactions stored in the block chain and the notion of a business network of peers and participants in the blockchain.

The key concepts of the shared ledger are: consensus (all participants agree the transaction is valid), provenance (the entire history of the asset and ownership changes are part of the record), immutability (no participant can tamper with a transaction) and finality (the ledger is the only record of the asset/transaction).

I hope you found this helpful sorting the confusing terminology around blockchain. Drop me a note in the comment section below if you think I should clarify any of these concepts.

What do read next:

• Blockchain applications in Media & Entertainment
• Khan Academy's series on Blockchain
• A step by step video walk through of Blockchain, nonce and hash and a mock website for you to play with Blockchain (by Anders Browneorth)